Earned income includes wages, salaries, tips, and self-employment earnings that count toward your taxable income.
Understanding What Earned Income Really Means
When you file your taxes, one of the most important numbers you report is your earned income. This term refers to the money you receive for working — whether you’re an employee, an independent contractor, or self-employed. It’s the income you earn through effort, labor, or services you provide.
Earned income is different from unearned income, such as interest, dividends, or rental profits. Those types of income may still be taxable, but they don’t come from working directly. Earned income comes from your time, skills, and services.
What Counts as Earned Income?
The IRS includes several types of payments under earned income.
Wages and salaries
This includes the pay you receive from an employer, whether you’re paid hourly or earn a fixed annual salary. It also includes bonuses and commission payments.
Tips
Tips are a form of earned income and must be reported if they total $20 or more in a month. This applies to restaurant workers, delivery drivers, beauty professionals, and others who regularly receive tips.
Taxable fringe benefits
Some benefits, such as certain employer-provided awards or allowances that count as taxable income, also fall under earned income.
Net earnings from self-employment
If you run your own business, work freelance, or do gig work, the profit you earn is considered earned income. This includes money from online selling, consulting, tutoring, rideshare driving, or any other paid service you offer.
Why Earned Income Matters for Taxes
Earned income is more than just a paycheck — it affects several important parts of your tax return.
Calculating taxable income
Your earned income is included in your gross income, which is the starting point for figuring out how much tax you owe.
Eligibility for tax credits
Many tax benefits depend on how much earned income you have. For example, the Earned Income Tax Credit (EITC), one of the most valuable credits for working taxpayers, is based entirely on your earned income level.
Determining self-employment tax
Self-employed individuals pay both the employee and employer portions of Social Security and Medicare taxes. These are calculated based on net earnings from self-employment.
Retirement contributions
Some retirement accounts, such as IRAs, require you to have earned income to contribute.
Earned Income vs. Unearned Income
Understanding the difference between earned and unearned income can help you plan your finances more effectively.
Earned income comes from work
Examples include wages, salaries, gig work, and tips.
Unearned income does not come from work
This includes investment earnings, interest, dividends, and unemployment benefits.
Both may be taxable, but they are treated differently for certain credits and tax calculations.
Real-Life Examples
Example 1: A full-time employee
Maria earns a salary of $45,000 a year and occasionally receives a performance bonus. All of this is considered earned income.
Example 2: A freelancer
James designs websites and earns $60,000 from clients. His income, after subtracting business expenses, is earned income from self-employment.
Example 3: A part-time worker who receives tips
Lily works at a café and earns hourly wages plus tips. Both count as earned income, and the tips must be reported.
Example 4: A gig worker
Alex drives for a rideshare service and earns $300 per week after expenses. This is earned income and must be reported as self-employment income.
Final Thoughts
Earned income is the foundation of your tax return — it includes wages, salaries, tips, and profits from self-employment. Understanding what counts as earned income helps you report your taxes accurately, qualify for important credits, and plan your financial future more effectively. Whether you work for an employer or for yourself, the money you earn through your labor plays a key role in determining your tax responsibilities and opportunities.
